We are six years into a bear market cycle with intractably bearish fundamentals and no end in sight. A potential interplay between trade war politics, planting intentions and weather could induce volatility and its attendant risks and opportunities. Even so, we start 2019's northern hemisphere growing season in a badly oversupplied situation.

In the USDA's first estimates of the 2019-20 marketing year, closing soybean inventories were pegged at 26.4 million tonnes. After closing the last marketing year at a record 27 million tonnes, analysts had hoped US bean inventories would fall to a consensus 8% to 24.9 million tonnes –but it was not to be.

China's ASF epidemic slashed its been import requirement below initially projected levels. While soybean imports of all other nations increased by 6.3 million tonnes or 8.5% over two years, China's purchases fell by 7 million tonnes over this same time.

As a result, instead of falling from 58 million tonnes to 51 million as initially projected, 2018-19 US soy exports plunged to 48 million tonnes, their lowest level since 2013-14. With both the US and Brazilian crops repeatedly coming in larger than projected, closing 2018-19 world bean inventories were revised from 107 million tonnes to a record 113.18 million tonnes.

Hence, after more than doubling from 12 million to 27 million tonnes in one marketing year, no progress will be made on reducing soybean inventories in 2018-19: The USDA now expects American soybean stocks to close out 2019-20 at 26.4 million tonnes, a mere 2.5% below last year's record level. It means that America's bean stocks-to-use ratio will jump from 10.5% two years ago to 23.8%.

These deflationary bean fundamentals can be mostly traced back to China's African Swine Fever epidemic and its trade war with America. Both of these factors helped keep China's 2018 feed production 10 million tonnes below its 2012 and may depress it further this year.

As the attached graph shows, rising soybean import volumes in the rest of the world are more than offset by falling Chinese demand. Hence, after peaking at over 152.9 million tonnes in 2016-17, world soybean imports fell back to 149.6 million tonnes last year –even as the marketing year's harvest exceeded world bean consumption by over 15 million tonnes. Going forward, the USDA forecasts that world soybean imports will amount to less than 151 million tonnes this year.

On one hand, the deflation is impacting planting intentions. 2018-19's world soybean harvest is projected 1.8% or 6.5 million tonnes below last year's. On the other hand, with both world bean harvests and crushing forecasted at approximately 355.5 million tonnes, world soybean inventories will stay at the record 113 million tonne level for a second consecutive year. With the world soybeans stocks-to-use ratio moving from 32.5% to 31.8%, there is no relief in sight from the current oversupply situation.

Consequently, CBOT soy reacted by falling to US$8.09/bushel, it's lowest level in 10 years, with a cumulative 11% or $1.00/bushel decrease in price during the 30 days prior to the USDA report's release.

Over the short-term, trade war tariffs (including the 25% tax US soybeans) mean that at the time of publication, July paper soybean futures in Parnagua, Brazil were selling at a US$0.80/bushel or approximate 10% premium to current CBOT futures. Here, smart traders are leveraging that China will be just as dependent on Latin American soy harvests and inventories as it was last year.

Unfortunately, in both absolute terms and as a percent of consumption, world soybean inventories have not yet started to decline.

Until they do, there is no basis for soybeans to trade outside their current range or lower: The good news is that while soy rebounded by a few percent thereafter, the US$8.09/bushel is the lowest market bottom reached during CBOT soybean's current, post-2012 market downcycle. While it recovered to over US$8.30/bushel within days, this price's long-term sustainability is in doubt.

The bad news is that soybeans will need to establish a market bottom below US$8.00/bushel before beans can enter a new market upturn. At the very least, this implies that beans need to stay at this level or lower for the next six months to a year, if not longer.

Corn's situation is by comparison far more optimistic and this can be seen in the market's behavior: Since entering the post-2012 bear market, corn established market bottoms at US$3.23/bushel, US$3.25/bushel, US$3.43/bushel and as of yesterday, US$3.46/bushel.

The fact that each corn bear market bottom has been higher than the previous several consecutive times is an indicator that the golden grain has turned the corner. Moreover, its tightening market fundamentals bear out this assessment. For 2019-20, corn's 27.5% world stocks-to-use ratio cannot be taken seriously, as 61% of inventories are inside China's walled-off, protected market.

Outside China, the world corn stocks-to-use ratio is nearly half this amount and near levels that sparked the previous late 2000s and early 2010s corn rallies –though we can't expect that history to repeat– at least not for a few more years.

When China's walled off corn market is excluded, world inventories (excluding China) and stocks-to-use ratio increased from 2018-19's 116.1 million tonnes and 13.5% to a USDA projected 122.9 million tonnes and 14.2% respectively --but these calculations are highly likely to be revised downwards: They are based on US crop that has not yet been fully planted and South American growing season that is almost six months away.

Moreover, a strong case can be made that the USDA's forecast of a record-breaking 381.8 million tonne American harvest is far too optimistic: Due to severe flooding and unusual late April/early May snowstorms, four US states which produce nearly 40% of each year's corn harvest –Illinois, Minnesota, Indiana, and South Dakota are seriously behind their normal planting schedule.

By the second week of May, 66% of the corn crop should have been planted but the USDA reported that only 30% had been. The soybean crop was only 9% planted compared to the 30% average for this time of year. Corn has a longer growing period than soybeans and is more adversely impacted by late planting.

Consequently, with many farmers having suffered several late snowfall and flooding incidents, their land may not dry out in time to plant corn. If that occurs, many farmers will be forced to switch to soybeans or other crops that have a shorter growing season than corn. In fact, with corn and soybean prices both at cyclical lows and near break-even level, many farmers may even switch to other crops in hopes of reaping higher returns.

Outside America, most Brazilian corn crop estimates are in the 96 to 99 million tonne range and imply the USDA's 101 million tonne harvest estimate is too high. Consequently, five to 10 million tonnes of US and Brazilian corn will probably "vanish" from official USDA estimates in the coming months.

--That would pull the USDA's projected 2019-20 world corn inventory and stocks-to-use ratios below last year's levels. The resulting market volatility would provide unexpectedly strong support for corn prices while deflating beans more than most market observers would expect.

But while world corn supplies are slowly falling back to actual demand, the way they are doing so is rather odd: China's walled off corn market will see a steep inventory decline of 8.6%, from 209.8 million tonnes to 191.8 million tonnes. With this year's expected harvest exceeding Chinese corn consumption by a whopping 25 million tonnes, China's corn inventory drop could be even greater should Beijing decide to import fewer than the seven million tonnes of corn forecasted by the USDA.

Outside of China, a six million tonne inventory rise could easily be wiped out by a possible change in US planting intentions or bad US growing weather, to say nothing about the uncertainty surrounding Latin America's late-year planting season. We thus are in a situation where most of the world's reduction in corn inventories will occur in a country whose corn market functions outside of the world economy.

Provided no unusual crop growing weather occurs, all this implies firm corn prices with a US$3.50/bushel floor and modest (up to 30%) upside potential. For soybeans, the situation looks far more conservative: There appears no way to get those bloated inventories down, unless prices go below US$8.00/bushel and stay there long enough to discourage the planting of beans in Latin America later this year.

At this point, the game is to wait it out until the next sustained, multi-year feed crop market upturn. That could start as early as mid-2020 for corn but will not "take off" for several years until China's large corn inventory is drawn down to levels that justify steady, fast-growing mass imports. Soybeans are at least two years away from a strong secular market upturn and could use the help of low prices or bad growing weather to get their overstocked inventories in a downtrend.

Strategy? If you're a livestock farmer or feed mill, you can stock up on corn now but postponing bean purchases may reduce your costs. If you're a high risk/high reward speculator, the above forecast implies a combination of call options on corn near US$3.50/bushel and put options on soybeans slightly over US$8.00/bushel.

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